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How to Build a Virtual Data Room

When contemplating financial, corporate, or M&A transactions, it is important to have a comprehensive data room in place. Any potential partners, whether investors, merger partners, or strategic partners will want to review all of the company’s documentation relating to their corporate structure, operations, and financings.

The Steps to Building a Virtual Data Room

Step 1: Find a Data Room Provider

There are many data room providers out there. Some of the important differentiating attributes to consider are:

Permissioning: most data room providers allow permissioning, with which you can grant different file access to different individuals. This can be useful if you have multiple types of potential partners accessing the data room at the same time. Most platforms can also limit file downloads so that certain people can only view files on the web, not download.
Auditability: it can be very helpful to know who is looking at what files, for how long, and how often. This can help you gauge the interest of potential partners. For example, partner A may tell you they are interested in pursuing a relationship but they’ve only looked at three files and only logged in once, while partner B may have logged in numerous times and looked at every file in the data room.
Pricing: pricing can vary dramatically between platforms. Some platforms charge flat fees while others charge per user.
User Interface: the user interface can affect how potential partners view the process of conducting due diligence on your company. If the interface is slow, it may cause potential partners to fatigue of the process. Additionally, it may be important to choose a platform where users granted access to the data room cannot see who else has been granted access.
Storage/File Size/File Type Limitations:some data room providers have very strict limitations on the file types and file sizes allowed as well as the total amount of storage available. It is important to understand these limitations prior to selecting a platform.

Here is a list of some of the top rated data room providers from G2 Crowd.

Step 2: Determine Data Room Structure

Having a cohesive data room folder structure can make the process of conducing due diligence much easier. This is the structure we use for our clients’ data rooms:

Corporate Documents and Corporate Matters
Securities and Securities Matters
Financing Documents
Properties/Leases/Insurance
Intellectual Property; Rights and Permits
Other Contracts/Agreements
Products and Inventories
Regulatory Documents/Litigation
Employees and Consultants
Financial Information
Environmental Matters
Miscellaneous

Building a data room? Download our full due diligence list here. This due diligence list is in the form generally used by investment banks, private equity firms, venture capital firms, family offices, strategic partners, and M&A partners.

Step 3: Upload and Organize Files

When uploading files, you should rename files so the user knows what the file is without having to review it. For example, documents with names like “scan” and dates should be renamed to the actual file type. Additionally, consistent filing nomenclature and format should be used.

Text-based documents should be uploaded as PDFs which makes them easier to view. Financial documents should be uploaded as Excel files when applicable. This allows data room users to manipulate numbers to see how changing variables affects financials.

Step 4: Grant and Monitor Access

Once your data room is built, you are ready to grant access to users. Make sure you pay close attention to the permission settings for each user.

If your platform has auditability features, check frequently to see how active users are and what files they are viewing most. If you see that many users are accessing the same files multiple times, these may be critical files or they may have issues.

Let’s discuss how we can guide you through your transaction. Get in touch with our team below.

Raising Capital: Frequently Asked Questions

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Whether you’re funding expansion, developing new products, or stabilizing cash flow, the timing and strategy behind raising capital can significantly impact your company’s trajectory. However, there’s no universal answer to questions like when to raise capital, how much to raise, or which investors to approach. The right decision depends on your business’s unique goals, stage, and financial needs.

In this blog, we’ll break down the key considerations for raising capital, helping you evaluate when the time is right and how to prepare. From determining your company’s valuation to choosing the best capital partners, this guide will provide actionable insights to set you up for a successful capital raise. Whether you’re a startup founder or a seasoned executive, understanding these principles can make the difference between closing the funding you need and falling short. Let’s explore everything you need to know to raise capital with confidence and clarity.

The most frequently asked questions by companies raising capital

When is the right time to raise capital?

There is no single right answer to this question. Some companies may be raising capital for growth while others may be raising capital to stay in business.

Ideally, a company should raise capital when that injection of funds will allow them to significantly increase the company’s valuation and growth. If a company keeps raising capital without increasing the valuation, the founders and existing equity holders will be increasingly diluted and could end up owning very little of their company.

How should we value our company?

A company’s valuation should be based on comparable companies. One can find similar companies with similar transactions in the past and garner revenue and EBITDA multiples from those transactions.

For example, there are many third party data services like PitchBook that provide valuation metrics for different industries. You can also research public companies in the same industry and value your company based on their enterprise value/revenue multiple. It is important to note that privately held companies tend to trade at a discount to publicly held companies.

Some factors that affect valuation multiples are: growth rate, profitability, and debt.

We say that the most important valuation is the one that gets your company funded. There are ways to allow management to earn back some of the dilution over time through methods like option plans and claw backs.

How much capital should we raise?

The easiest answer to this question is as much as you need. You don’t want to raise so much that you are giving away more equity or taking on more debt than necessary. On the other hand, you do not want to constantly worry about capital, and, as a result, be distracted from operating at fully capacity.

What types of investors should we seek?

Different types of investors provide different value to companies. For example, Venture Capital and Private Equity investors tend to be more hands on than Family Office investors.

If your company is looking for significant guidance as well as capital, venture capital and private equity investors might be the right partners. The downside of the guidance is that it comes with increased control over the company’s operations.

Family office investors tend to have many investments and often run their own businesses as well. They are generally less interested in being involved in a company’s operations and are more interested in being passive investors.

Different types of investors are also interested in different sized companies.

Download our report Who is the Right Capital Partner ►

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►.

How many investors should we approach?

It’s always better to approach a number of investors. We like to say, “it’s not closed until it’s closed”. Approaching multiple investors may also get you different term sheets, some with better terms than others.

Even if your company prefers one investor or another, there is usually not a reason to reject an investor until the funds are in your bank account.

Should we raise debt or equity?

There is no simple answer to this question. Debt can be great when the increase in revenue or valuation from the additional funds is so great that paying back the debt won’t be an issue for the company. Debt financing can also be great to finance receivables, purchase equipment, finance a purchase order, or to finance an acquisition.

Equity financing is often preferred by companies because there is no need to pay back the investor. Equity financing does however come with a much greater amount of control. Equity holders are also diluted by bringing in additional equity capital, which may not be preferable if an acquisition or exit is in sight.

Equity financing is also used when a company has existing debt or there is something preventing them from taking in additional debt financing.

Investors often structure their investments as a hybrid between the two, such as convertible notes. These types of structures protect the investor in the event of failure, but allow them to take advantage of the upside in the event of success.

What value does ClearThink Capital provide to companies raising capital?

When we work with companies, we bring our decades of capital raising experience to the table. We work as our client’s advisor and assist them by:

Conducting a full due diligence to remediate any potential issues prior to meeting with investors
Introducing the company to potential capital partners, including investment banking firms
Structuring the transaction to be client advantageous
Advising as to transaction terms
Preparing the transaction related documentation

Do we need an audit?

While some investors will require an audit, many will not. Venture capital, private equity, and strategic investors are more likely to require an audit, while family offices are less likely.

Do I need to put together a data room?

Almost all investors will require the company to put together a data room with all their corporate documents. It is best to put the data room in place prior to starting the capital raising process.

Download our due diligence list here ►

How long does the process take?

The amount of time it takes to raise capital can vary dramatically, but the timing is mostly dependent on the company. To ensure the quickest capital raising process, make sure to:

Create and populate a data room prior to beginning the process
Respond quickly to document/data requests from investors
For most companies, the capital raising process takes three to six months.

Should I raise capital through a crowdfunding platform?

While platforms like Kickstarter and Indiegogo can be great for crowdfunding products, we generally advise against raising capital through equity crowd funding. In 2018, the average crowd funding investor invested $741. As a result, companies tend to have thousands investors to manage.

Additionally, having such a large number of investors turns off most institutional investors, and will make it much more difficult to raise large amounts of capital in the future.

Taking a look at the statistics from 2018 crowd fundings:

$161K Average funds raised per unique offering

61% Successful offerings

$741 Average investment per investor

State of M&A: Q3 2019

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5 Things To Ask Potential Investors

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When taking in a capital partner, people tend to focus most on the amount of money the partner is investing into the company and the valuation. While these are both important things to consider, there are many other things a company should ask potential capital partners.

Ask your potential investors these five questions

How involved do you like to be in your portfolio companies?

A capital partner’s involvement in a company can vary dramatically. Venture and private equity firms tend to be highly governance-focused, which means that they impose substantial limitations on management autonomy and have substantial additional consent and other rights. Some capital partners want to know every detail of a company’s business with updates multiple times a week, while others want an update once a quarter.

Our experience has been that family offices generally tend be less focused upon governance and want to be kept current on company progress, but prefer not to assume operational or board roles within their investments.

Generally, we prefer to match companies with capital partners that do not desire to be actively involved in the company’s operations. When we work with a company, we do so because we believe that the company’s management team has the ability to lead the company to success. Partners should be able to provide advice when requested, but should not interfere with a company’s ability to execute.

What is your history of conversion vs repayment?

Many capital partners prefer to structure growth capital transactions as convertible notes, rather than straight equity. A convertible note is debt with the option on the part of the investor to convert the debt into equity.

Investors look at convertible notes two different ways. The first group looks at convertible notes as essentially an equity investment with protections in the case that things should not go as planned. The second group look at convertible notes as a loan to the company, with the ability to take advantage of the upside if they should choose to do so.

It is important to understand a capital partner’s plans relating to conversion so as to give the company the opportunity to plan for repayment or equity dilution.

How important is a liquidity event and when?

Liquidity events are events in which company holders have the ability to sell or otherwise capitalize on the value escalation of their position in the company. The two most common liquidity events are public offerings and acquisitions, although contractual liquidity events, such as redemptions, as common as well.

Depending on the capital partner, a realistic plan for a liquidity event may be very important. From the investor’s perspective, their biggest fear is becoming a captive minority holder of equity in your company.

For example, an investor can purchase equity in a company, only to have the management team pay themselves higher and higher salaries, with no plan for a liquidity event. As a result, the capital partner is left with a lost investment and no return.

Do you engage in a lot of litigation?

It is not uncommon for emerging and middle market companies to experience delays when either repaying debt obligations or paying redemption prices. Growth requires substantial capital and many companies inaccurately budget for these events.

Most capital partners are understanding, to a degree, and will afford their portfolio companies leniency as to timing; others have no tolerance for delays and are quick to assert their rights. While many companies would accuse the latter group of “not being team players”, it is an unfair characterization as investors are entities to the benefit of the terms of their investment.

Understanding the character of your capital partners and their history, as well as proper planning and budgeting, can spare you a great deal of angst when payment deadlines are approaching.

What management positions have you held and boards of directors have you served on?

An investor’s past experience can be very valuable to a company. Many times, capital partners have past experience running and growing their own companies or companies.

Whether or not their past experience is in a similar industry to the company in which they are investing, having someone else with experience on a company’s team can help with strategic decisions. An investor can also provide access to influencers, clients, supply chain partners, and additional capital.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.

Grow a Company Without Giving Away Equity

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Exiting: Sell Your Company or Go Public?

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When the time comes for a company to consider an exit strategy, there are two primary options available: selling the company or going public. Both routes offer unique benefits and challenges, and the decision will depend on the company’s goals, market conditions, and the preferences of its shareholders. Understanding the nuances of each option is critical to making the best decision.

This guide will walk you through the processes, advantages, and disadvantages of both selling your company and going public, helping you decide which path aligns with your company’s long-term vision.

Selling Your Company

The Process

Selling your company requires strategic preparation, and the process typically unfolds in several key steps:

Due Diligence Review

The first step is conducting a due diligence review. This involves examining the company’s operations, financials, and legal standing to identify and address potential red flags that could deter potential acquirers. This review also helps the advisory team fully understand the business to effectively position it during negotiations.

Determining Ideal Acquirer and Sale Structure

Next, the company works with its advisor to identify the best-fit acquirer and determine the optimal sale structure. Factors such as cash vs. stock payments, upfront vs. deferred payments, and earn-outs are evaluated to structure a deal that maximizes shareholder value.

Valuation Analysis

Setting a realistic valuation is essential. This is typically based on revenue or EBITDA multiples of comparable companies in the same industry. The valuation provides a target acquisition price for negotiations.

Acquirer Outreach

Once the valuation and sale structure are established, the advisory team will begin reaching out to potential acquirers. Calls and meetings will be arranged to explore interest and align goals between the seller and the acquirer.

Negotiation and Transaction Management

The advisory team manages negotiations, ensuring that the company is not undervalued and that the terms of the deal are fair. This helps the company secure the best possible outcome while mitigating risks.

Working with an advisor whose interests align with the company, rather than the acquirers or capital partners, is essential to navigating this process successfully.

Advantages of Selling Your Company

Lower Costs: The M&A process is generally less expensive than the public offering process.

Immediate Liquidity: Acquisitions often provide a significant portion of the payment in cash upfront, offering immediate financial benefits to shareholders.

Disadvantages of Selling Your Company

Employment Obligations: Key employees are often required to stay with the company post-sale to ensure a smooth transition, which may limit their flexibility.

Lower Valuation Multiples: Acquisitions generally yield lower valuation multiples compared to public companies.

Missed Post-Sale Growth Opportunities: Shareholders cannot capitalize on potential post-sale value increases since they no longer own the company.

Going Public

The Process

Taking a company public is a more complex process than selling, but it comes with unique benefits. Here’s an overview of the key steps involved:

Due Diligence Review

The first step in preparing for a public offering is conducting a due diligence review. This process helps identify and resolve any potential issues that could arise during the public offering and provides a comprehensive understanding of the company’s financials and operations.

Financial Model Preparation

A detailed financial model is created to project future growth and support valuation discussions. Investment banks will use this model to stress test the company’s financials and determine an appropriate valuation.

Selecting an Investment Bank

Once due diligence and financial modeling are complete, the company is introduced to potential investment banks. The chosen investment bank will act as the underwriter for the public offering, raising the necessary capital to fund the business.

Bridge Financing (if needed)

Before initiating the public offering, some companies may secure bridge financing, often in the form of convertible notes, to maintain operations and growth during the preparation phase.

Public Offering and Advisory Support

Throughout the public offering, the advisory team assists the company, ensuring the transaction is structured favorably and that the company’s interests are prioritized.

Advantages of Going Public

Higher Valuations: Public companies typically command higher valuations compared to those sold through acquisitions.
Capitalizing on Post-Offering Growth: Shareholders can benefit from the appreciation in the company’s value after going public, creating opportunities for wealth accumulation.

Disadvantages of Going Public

Higher Costs: The IPO process tends to be more expensive than selling the company, including fees for legal, accounting, and underwriting services.
Resale Restrictions: Shareholders may face restrictions on selling their shares for a period after the public offering, limiting immediate liquidity.

Choosing the Right Exit Strategy

Ultimately, the decision between selling your company and going public depends on your long-term goals, growth strategy, and current market conditions. Selling may be a better fit if your priority is immediate liquidity and a streamlined process, while going public can offer higher valuations and long-term growth potential.

Both processes are complex and require expert guidance to achieve the best results. Whether you’re considering an acquisition or an IPO, working with a trusted advisor who prioritizes your company’s success can help you navigate the complexities and ensure a favorable outcome. At ClearThink Capital, we specialize in guiding companies through both M&A transactions and public offerings. Contact us today to explore the best exit strategy for your business.

What is Bridge Financing?

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Bridge financing is generally a short-term debt financing that provides capital to a company to enable it to consummate another transaction, e.g., a terminal event, and is generally repaid from the proceeds of such transaction.

For example, if a company is closing a large funding in 90 days, it may require a smaller short term funding immediately to get to the larger closing and will use of portion of the proceeds of the larger funding to repay the bridge financing.

Is This a “Bridge” or a “Pier”?

Other than the terms of the bridge financing, the greatest concerns of a prospective investor are:

“what is the event that we are bridging to, e.g., the terminal event?”
“what are the terms of terminal event?” and
“how likely is that the terminal event will be consummated?”

Terminal events can be any event which either provides the necessary liquidity to the company to repay the bridge note, e.g., a public offering, a private financing, a contractual payment, etc., or could be an event designed to permit or require the investor in the bridge to convert their bridge note into securities of the company at a discount to the valuation used in the terminal event.

As a result of these factors, a bridge financing, even though relatively short-term in nature, is in many ways riskier than ordinary corporate credit. In addition to the overall credit risk associated with the company, there is the risk that the terminal event will not take place or that counterparties to the terminal event may be required to change as a result of market conditions or otherwise.

In general, bridge financing has the following terms and conditions:

Bridge financing terms and conditions

Interest

Interest can range from very reasonable to mezzanine level (4% to 18% per annum).

Maturity

Bridge debt tends to mature within one to two years.

Conversion

If issued in connection with a terminal event which is a capital transaction, bridge debt is often convertible into the securities to be issued in the terminal event at the lower of a discount to the pricing of the terminal event or at a fix price. Conversion may be at the option of the company or the investor, depending upon the transaction. In the case of public companies, conversion may be mandatory if market price and volume milestones are satisfied.

Prepayment

Non-convertible bridge financings tend to be subject to repayment without premium or penalty, although at times yield protection provisions will be triggered, resulting in an additional payment to the investor. Convertible bridge financings are usually subject to prepayment only with prior written notice with a sufficient time period to permit voluntary conversion by the investor.

Original Issue Discount

Particularly in the case of bridge financings conducted by private companies, although not exclusively, the bridge note may contain provisions requiring an original issue discount (e.g., a payment in excess of the principal amount invested and accrued and unpaid interest).

Equity Kicker

Bridge notes are often accompanied by equity securities designed to serve as an addition deal sweetener or “kicker”. This kicker can be in the form of warrants or shares of common or preferred stock.

Conclusion

Bridge financing serves a vital function by permitting companies with limited capital to continue operations and growth until important terminal events take place. As a result, bridge financing is often relatively expensive, but can be the perfect “fuel in the tank” which a company needs to execute its business and growth objectives.

Seeking bridge financing? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.